8 ms·

So we've been in one of the longest bull markets in modern history. I have been amazed at the wilful ignorance of Crypto Andys when it comes to why financial ma

by jmyeet 5y ago

So we've been in one of the longest bull markets in modern history. I have been amazed at the wilful ignorance of Crypto Andys when it comes to why financial markets, the financial system, central banking, debt and debt markets are the way they are. There's a certain delight [1] in watching increased market volatility exposing how understanding merkle trees and consensus protocols doesn't make you an expert on what the financial system is, how it works and why it is the way it is. So lots of countries have tried pegging their currencies to other currencies, most commonly the US dollar. Your ability to do so is limited by how much money you are prepared to throw at it to counterbalance market forces. I mean this is one reason why we moved from Bretton-Woods to floating exchange rates. Central banks have far more ability to defend a peg. Still a pet can be attacked (eg [2]) if the peg is sufficiently out of line with the market. It's going to be funny to watch these crypto trainwrecks learn these lessons (again) the hard way. [1]: https://www.youtube.com/watch?v=nCQGQ5qBQTA https://www.youtube.com/watch?v=nCQGQ5qBQTA [2]: https://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp https://www.investopedia.com/ask/answers/08/george-soros-ban...

bo1024 5y ago
These comments don't seem very relevant to stablecoins such as this one, which are algorithmic rather than backed. (Although they are now trying to back it, but that's not how it's designed.)
- throwawaygh 5y ago
  >>> UST loses peg >> There's a certain delight [1] in watching increased market volatility exposing how understanding merkle trees and consensus protocols doesn't make you an expert on what the financial system is, how it works and why it is the way it is. > These comments don't seem very relevant to stablecoins such as this one, which are algorithmic rather than backed Just... muah. Perfecto.
  - bo1024 5y ago
    I apologize if I gave the impression that I understand meekly trees
- tnzk 5y ago
  > which are algorithmic rather than backed. (Although they are now trying to back it, but that's not how it's designed.) genuine question, why are trying to do when it's covered by the 'algorithm'?
  - initplus 5y ago
    In this case the algorithm pegs the coin to another cryptocurrency, LUNA. You can algorithmically exchange 1 USD worth of LUNA for 1 UST at any time. But note that this algo doesn't help you cash out your LUNA! Is 1 USD worth of LUNA really worth 1 USD if there is nobody who will buy it from you? If there isn't a healthy USD-LUNA market, the fact that the UST-LUNA market is algorithmically enforced doesn't help you that much. Algorithm won't help you make a healthy LUNA-USD market, only way is to have a market maker putting up USD and LUNA reserves to offer liquidity to buyers/sellers.
    - jstrong 5y ago
      luna is way down, but there's still a luna/usd market.
      - initplus 5y ago
        Price of LUNA/USD doesn't matter so much - the issue is liquidity. Without a market maker offering sufficient liquidity to the LUNA/USD market the peg will break down. Yes there is still a price on the LUNA/USD pair, and this price has not collapsed completely. But there just aren't enough buyers on the USD side of the trade. The market isn't big enough to handle the demand to exit LUNA to USD. And so the UST peg breaks down.
  - bo1024 5y ago
    That’s my question too.
- jmyeet 5y ago
  I hope, for your sake, you're not putting too much faith in the "algorithmic" part of this because when it comes to a central bank maintaining a peg, it's basically exactly the same thing. You should look into what open market operations actually looks like in practice. Actually the stablecoin is worse. In the case of this article the reserve funds are seemingly crowdfunded. Central banks can just print money if they have to. This of course leads Crypto Andys eschewing the printing of money with disdain but it's actually a feature not a bug.
  - bo1024 5y ago
    No dog in the fight, just want to understand. From my quick look at open operations it just sounds like backed stablecoins e.g. USDT, which again is very different from how an algorithmic stablecoin is set up (not supposed to be backed at all).
    - mattwilsonn888 5y ago
      It is very different and the top commenter clearly has a dog in the fight. Also modelling your stablecoin off what Terra has done, even to critique stable coins, is foolish.
  - bb88 5y ago
    > In the case of this article the reserve funds are seemingly crowdfunded. The money went elsewhere rather than backing the coin. They took the money out of the fund and assumed $LUNA would be able to back it forever. Jokes on them. amiright?
- dan-robertson 5y ago
  When modern countries try to maintain a currency peg, like the BoE example above, they are also not really ‘backed’ in the sense I think you mean.
  - bo1024 5y ago
    But it seems they do try to participate in the market in order to move demand so that the price stays at 1. Which is just not how UST is designed at all. So I’d like to understand the difference.
hahajk 5y ago
Is it really that hard to defend a peg? As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin. Then you can earn interest on the dollars.
- deleted 5y ago
  [deleted]
- lcvw 5y ago
  My understanding is that some stablecoin projects do that. The issue is greed, it’s too tempting to invest the money in something riskier and keep all of the returns. When you lose the money you have nothing to defend the peg with.
  - Siira 5y ago
    This can be easily solved via governmental certification.
    - chronolitus 5y ago
      Good idea! Maybe a note that attests that your 1 token is backed by government certification? What about making that note green, to make sure people understand that it is the real thing?
      - ohples 5y ago
        Yeah, but they wouldn't give a damn about a greenback-a-dollar, they'd probably spend it fast as they can.
    - _Algernon_ 5y ago
      Looks at inflation rate Yes, cause the government is so much better at this stuff.
      - Siira 5y ago
        Yes, ultimately, the gold standard is the only way to stop arbitrary taxation AKA inflation.
tmp_anon_22 5y ago
Its not about "winning" its about skimming enough off the top that you end up rich and someone else is holding the bag. We don't prioritize punishing white collar crimes. They will keep doing it because as far as they're concerned it works. I guarantee you these folks have been partying it up since the second they had the cash on hand.
- nikanj 5y ago
  Most of the greater fool schemes are not crimes, so it's risk-free income (assuming you're able to spin the yarn to convince fools that your balanced merkle trees come with extra splines)
MuffinFlavored 5y ago
> understanding merkle trees and consensus protocols I don't think most people who invest in crypto know much about these
- nikanj 5y ago
  They know that line goes up, and this is the way to stop being poor
  - jboy55 5y ago
    And when they lose all their money in crypto, it'll be just like when they walked away from that essential oil company, and that house they were going to flip, and their beany babies, and that .com company and the herbalife in their garage and the ...
olalonde 5y ago
> I have been amazed at the wilful ignorance of Crypto Andys when it comes to why financial markets, the financial system, central banking, debt and debt markets are the way they are. Innovation often comes from outsiders. If we wait for the bankers and regulators of this world, we won't see much innovation happening in the way of banking/finance. > There's a certain delight [1] in watching increased market volatility exposing how understanding merkle trees and consensus protocols doesn't make you an expert on what the financial system is, how it works and why it is the way it is. That's kind of a sad sentiment to have, on HN of all places. Personally, I don't rejoice in the failure of people who take risks and push the boundaries. I hope they learn from their mistakes and keep innovating.
coffeemug 5y ago
What is the best book to understand the financial system is, how it works and why it is the way it is for a layman?
- lordnacho 5y ago
  IIRC there was a book called "how the city works" which I read as a junior trader. That's a non technical interview of what kinds of roles there are in finance, explaining what all the different players do.
  - calpaterson 5y ago
    You probably mean "The money machine: how the city works" https://www.amazon.co.uk/Money-Machine-How-City-Works/dp/0141042893 https://www.amazon.co.uk/Money-Machine-How-City-Works/dp/014... I agree, it's a good intro. Covers insurance too.
    - lordnacho 5y ago
      Yep
  - mey 5y ago
    Is it this book? https://www.koganpage.com/product/how-the-city-really-works-9780749459680 https://www.koganpage.com/product/how-the-city-really-works-...
- simonebrunozzi 5y ago
  Some of patio11’s blog posts are better, and more succinct, than most books.
- rchaud 5y ago
  Start with Investopedia articles. Here's one on currency pegs, and why most governments don't have free floating exchange rates. https://www.investopedia.com/terms/c/currency-peg.asp https://www.investopedia.com/terms/c/currency-peg.asp
mattwilsonn888 5y ago
The majority of people in crypto draw an intensely bright line between what Luna is doing, what Tether has done, and what Dai or even centralized fully backed stablecoins do. Maybe you should take off the sunglasses. Using Terra (a centralized ponzi chain) to attack all of crypto is peak cope; its peak strawman. If merkle trees aren't so hard to understand you would put your effort into thinking about how stable stable coins work rather than using the market swings to affirm your biases.
- root_axis 5y ago
  > Using Terra (a centralized ponzi chain) to attack all of crypto is peak cope Most of the cryptocurrency ecosystem is scams, this is just another data point demonstrating that fact. Frankly, your equivocating defense sounds more like "peak cope" than the comment you're replying to.
- gjulianm 5y ago
  Even DAI is kind of shady, if I understand correctly. The main mechanism they use to regulate demand and try to ensure the 1:1 exchange is the Dai Savings Rate, which is interest you earn by locking Dai into the savings smart contract. But right now, I don't think there's many places where you can actually use Dai to buy/sell goods and services, so the only "exit" is to sell that DAI to other people. Considering the few places where you can actually use cryptocurrencies, even stable ones like DAI, it's weird that there's so much demand and volume. Operations on DAI have amounted to almost a billion dollars in the last 24h according to Coinbase, how much of that comes from trading and how much from other economic transactions?

by jmyeet 5y ago

bo1024 5y ago

These comments don't seem very relevant to stablecoins such as this one, which are algorithmic rather than backed. (Although they are now trying to back it, but that's not how it's designed.)

throwawaygh 5y ago
>>> UST loses peg >> There's a certain delight [1] in watching increased market volatility exposing how understanding merkle trees and consensus protocols doesn't make you an expert on what the financial system is, how it works and why it is the way it is. > These comments don't seem very relevant to stablecoins such as this one, which are algorithmic rather than backed Just... muah. Perfecto.
- bo1024 5y ago
  I apologize if I gave the impression that I understand meekly trees
tnzk 5y ago
> which are algorithmic rather than backed. (Although they are now trying to back it, but that's not how it's designed.) genuine question, why are trying to do when it's covered by the 'algorithm'?
- initplus 5y ago
  In this case the algorithm pegs the coin to another cryptocurrency, LUNA. You can algorithmically exchange 1 USD worth of LUNA for 1 UST at any time. But note that this algo doesn't help you cash out your LUNA! Is 1 USD worth of LUNA really worth 1 USD if there is nobody who will buy it from you? If there isn't a healthy USD-LUNA market, the fact that the UST-LUNA market is algorithmically enforced doesn't help you that much. Algorithm won't help you make a healthy LUNA-USD market, only way is to have a market maker putting up USD and LUNA reserves to offer liquidity to buyers/sellers.
  - jstrong 5y ago
    luna is way down, but there's still a luna/usd market.
    - initplus 5y ago
      Price of LUNA/USD doesn't matter so much - the issue is liquidity. Without a market maker offering sufficient liquidity to the LUNA/USD market the peg will break down. Yes there is still a price on the LUNA/USD pair, and this price has not collapsed completely. But there just aren't enough buyers on the USD side of the trade. The market isn't big enough to handle the demand to exit LUNA to USD. And so the UST peg breaks down.
- bo1024 5y ago
  That’s my question too.
jmyeet 5y ago
I hope, for your sake, you're not putting too much faith in the "algorithmic" part of this because when it comes to a central bank maintaining a peg, it's basically exactly the same thing. You should look into what open market operations actually looks like in practice. Actually the stablecoin is worse. In the case of this article the reserve funds are seemingly crowdfunded. Central banks can just print money if they have to. This of course leads Crypto Andys eschewing the printing of money with disdain but it's actually a feature not a bug.
- bo1024 5y ago
  No dog in the fight, just want to understand. From my quick look at open operations it just sounds like backed stablecoins e.g. USDT, which again is very different from how an algorithmic stablecoin is set up (not supposed to be backed at all).
  - mattwilsonn888 5y ago
    It is very different and the top commenter clearly has a dog in the fight. Also modelling your stablecoin off what Terra has done, even to critique stable coins, is foolish.
- bb88 5y ago
  > In the case of this article the reserve funds are seemingly crowdfunded. The money went elsewhere rather than backing the coin. They took the money out of the fund and assumed $LUNA would be able to back it forever. Jokes on them. amiright?
dan-robertson 5y ago
When modern countries try to maintain a currency peg, like the BoE example above, they are also not really ‘backed’ in the sense I think you mean.
- bo1024 5y ago
  But it seems they do try to participate in the market in order to move demand so that the price stays at 1. Which is just not how UST is designed at all. So I’d like to understand the difference.

hahajk 5y ago

Is it really that hard to defend a peg? As long as you don’t spend the money people give you, you’ll have 1:1 dollars to stable coin. Then you can earn interest on the dollars.

deleted 5y ago
[deleted]
lcvw 5y ago
My understanding is that some stablecoin projects do that. The issue is greed, it’s too tempting to invest the money in something riskier and keep all of the returns. When you lose the money you have nothing to defend the peg with.
- Siira 5y ago
  This can be easily solved via governmental certification.
  - chronolitus 5y ago
    Good idea! Maybe a note that attests that your 1 token is backed by government certification? What about making that note green, to make sure people understand that it is the real thing?
    - ohples 5y ago
      Yeah, but they wouldn't give a damn about a greenback-a-dollar, they'd probably spend it fast as they can.
  - _Algernon_ 5y ago
    Looks at inflation rate Yes, cause the government is so much better at this stuff.
    - Siira 5y ago
      Yes, ultimately, the gold standard is the only way to stop arbitrary taxation AKA inflation.

tmp_anon_22 5y ago

Its not about "winning" its about skimming enough off the top that you end up rich and someone else is holding the bag. We don't prioritize punishing white collar crimes. They will keep doing it because as far as they're concerned it works. I guarantee you these folks have been partying it up since the second they had the cash on hand.

nikanj 5y ago
Most of the greater fool schemes are not crimes, so it's risk-free income (assuming you're able to spin the yarn to convince fools that your balanced merkle trees come with extra splines)

MuffinFlavored 5y ago

> understanding merkle trees and consensus protocols I don't think most people who invest in crypto know much about these

nikanj 5y ago
They know that line goes up, and this is the way to stop being poor
- jboy55 5y ago
  And when they lose all their money in crypto, it'll be just like when they walked away from that essential oil company, and that house they were going to flip, and their beany babies, and that .com company and the herbalife in their garage and the ...

olalonde 5y ago

> I have been amazed at the wilful ignorance of Crypto Andys when it comes to why financial markets, the financial system, central banking, debt and debt markets are the way they are. Innovation often comes from outsiders. If we wait for the bankers and regulators of this world, we won't see much innovation happening in the way of banking/finance. > There's a certain delight [1] in watching increased market volatility exposing how understanding merkle trees and consensus protocols doesn't make you an expert on what the financial system is, how it works and why it is the way it is. That's kind of a sad sentiment to have, on HN of all places. Personally, I don't rejoice in the failure of people who take risks and push the boundaries. I hope they learn from their mistakes and keep innovating.

coffeemug 5y ago

What is the best book to understand the financial system is, how it works and why it is the way it is for a layman?

lordnacho 5y ago
IIRC there was a book called "how the city works" which I read as a junior trader. That's a non technical interview of what kinds of roles there are in finance, explaining what all the different players do.
- calpaterson 5y ago
  You probably mean "The money machine: how the city works" https://www.amazon.co.uk/Money-Machine-How-City-Works/dp/0141042893 https://www.amazon.co.uk/Money-Machine-How-City-Works/dp/014... I agree, it's a good intro. Covers insurance too.
  - lordnacho 5y ago
    Yep
- mey 5y ago
  Is it this book? https://www.koganpage.com/product/how-the-city-really-works-9780749459680 https://www.koganpage.com/product/how-the-city-really-works-...
simonebrunozzi 5y ago
Some of patio11’s blog posts are better, and more succinct, than most books.
rchaud 5y ago
Start with Investopedia articles. Here's one on currency pegs, and why most governments don't have free floating exchange rates. https://www.investopedia.com/terms/c/currency-peg.asp https://www.investopedia.com/terms/c/currency-peg.asp

mattwilsonn888 5y ago

The majority of people in crypto draw an intensely bright line between what Luna is doing, what Tether has done, and what Dai or even centralized fully backed stablecoins do. Maybe you should take off the sunglasses. Using Terra (a centralized ponzi chain) to attack all of crypto is peak cope; its peak strawman. If merkle trees aren't so hard to understand you would put your effort into thinking about how stable stable coins work rather than using the market swings to affirm your biases.

root_axis 5y ago
> Using Terra (a centralized ponzi chain) to attack all of crypto is peak cope Most of the cryptocurrency ecosystem is scams, this is just another data point demonstrating that fact. Frankly, your equivocating defense sounds more like "peak cope" than the comment you're replying to.
gjulianm 5y ago
Even DAI is kind of shady, if I understand correctly. The main mechanism they use to regulate demand and try to ensure the 1:1 exchange is the Dai Savings Rate, which is interest you earn by locking Dai into the savings smart contract. But right now, I don't think there's many places where you can actually use Dai to buy/sell goods and services, so the only "exit" is to sell that DAI to other people. Considering the few places where you can actually use cryptocurrencies, even stable ones like DAI, it's weird that there's so much demand and volume. Operations on DAI have amounted to almost a billion dollars in the last 24h according to Coinbase, how much of that comes from trading and how much from other economic transactions?